The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

Australian economic briefing by David Rumbens

Greens Senators Scott Ludlam and Larissa Waters were recently forced to resign from the Federal Parliament after it was found that dual citizenships made them ineligible to hold their seats.

In a country that is frequently described as a “nation of immigrants”, the removal of two high profile dual citizenship parliamentarians raises questions about how well the Australian parliament reflects the wider Australian population.

Recently released 2016 Census data helps give us a steer on this issue.

In 2016, over a quarter (26.3%) of the Australian population was born overseas, compared to just 10.3% of our Canberra parliamentarians (23 members across the House of Representatives and the Senate after accounting for the exits of Ludlam and Waters). The under-representation of overseas born parliamentarians is certainly not helped by the Constitution’s restriction on dual citizenship.

And it’s not just country of birth where the parliamentary population doesn’t match up.

Australia’s high rates of migration and multitude of Indigenous dialects leads to a rich diversity of language across the country. According to the 2016 Census, 27.3% of Australian residents speak a language other than English at home. But in the Federal Parliament, this level drops to just 8.5%.

Another metric of cultural diversity is Aboriginal and Torres Strait Islander (i.e. Indigenous) representation. There are currently five Indigenous members of the Federal Parliament, across three political parties. While representation is still below that of the wider Australian population based on the 2016 Census, there were no Indigenous Australians in Canberra 10 years ago, and only four ever prior to then.

Women have outnumbered men in the Australian population since 1981, but this has never been reflected in the Australian Parliament. While all major parties currently have at least one woman in a leadership position, and we have seen an increase over the last 10 years (from 28.3% in 2007), just under a third of current parliamentarians are women.

Share of ages

25-39

40-54

55-70

Parliament

11.3%

54.8%

33.9%

Australia*

36.4%

34.6%

29.1%

*share of Australians between 25 and 70 years of age

And the age distribution in Canberra is also skewed, heavily favouring the Gen X cohort at present, but with a still decent representation of baby boomers. The 40-54 age group accounts for 34.6% of Australians between 25 and 70 years of age, but an over-sized 54.8% of federal parliamentarians. This is not surprising, given that we tend to elect parliamentarians who have already had a career elsewhere. But baby boomers have lost their dominance and Millennials (those up to their mid-30s) are increasingly being elected. So watch out for a generational changing of the guard over the next decade (and perhaps some different policy priorities to go with it).

The world seems like a much more uncertain place today than it was before the financial crisis. The International Monetary Fund reckons that macroeconomic risk is running at twice the level it was before the failure of Lehman in 2008. The backwash from the crisis, debt-laden governments, low productivity and risk averse businesses and banks, has spelt weaker growth.

Uncertainty has also been fueled by shocks such as political surprises and natural or man-made disasters. In the last few years markets have had to contend with a stream of worries, from conflict in Eastern Ukraine and the Middle East, to Brexit, the Gulf of Mexico oil spill and Donald Trump’s surprise victory.

But what lasting effect do such external shocks have on markets and economies?

Financial markets see-saw wildly on big surprises. But recent research by Jens Nystedt of Morgan Stanley Investment Management shows that the longer term effect of geopolitical shocks on equities are often surprisingly small.

Take Japan’s attack on Pearl Harbor in July 1941, an event that precipitated America’s entry into the Second World War. The US equity market fell by 10% in the wake of the attack. But within 36 days equities had recovered to pre-attack levels. The equity market shrugged off an event that changed American and world history.

Mr Nystedt’s analysis covered many other landmark events of last 80 years including the Cuban missile crisis, President Nixon’s resignation and 9/11. He found that a typical geopolitical shock resulted in a median decline of 3.4% in the equity market which was recouped in five days.

Markets, for all their skittishness, tend to see through shocks, focusing on fundamentals, particularly prospects for GDP growth and profits. When things go wrong equities also gain support from the anticipation of a policy response, such as interest rate cuts or, in the case of conflict, more government spending.

The insouciant reaction of markets to geopolitical shocks suggests that, by and large, they don’t change the direction of growth. History confirms that this is the generally the case.

The flu pandemic of 1918 to 1920 was probably the worst natural disaster in modern history, killing between 50 and 100 million people, many more than died in the First World War. Yet the impact on US GDP growth was only modest and not remotely in proportion to the scale of the human tragedy.

A 2002 Congressional study said that the 9/11 terrorist attacks should be seen “…as a human tragedy rather than an economic calamity. Notwithstanding their dire cost in human life, the direct effects of the attacks were too small and too geographically concentrated to make a significant dent in the nation’s economic output”.

How can such terrible events have such small economic effects?

The leading academic in this field, JM Albala-Bertrand, finds that the effects of disasters are generally less than expected because we underestimate the adaptability of people and economies. That resilience means that when things go wrong activity is not destroyed, but displaced from one week, month or year to another.

We need to bear in mind that terrible destruction of the capital stock – of buildings, plants and infrastructure – does not necessarily cause an equivalent fall in GDP growth. Indeed, rebuilding lends support to growth.

And in modern economies policymakers work hard to counter the effects of shocks. The Bank of England cut interest rates and provided liquidity to the banks after the Brexit referendum. The 9/11 attacks triggered a surge a near doubling in US military expenditure which boosted growth. Pearl Harbor resulted in a vast, Keynesian-style surge in US government activity.

The US economist Jack Hirschliefer gives, as an example of human resilience, Hamburg’s recovery from the Allied bombing raids of 1943. These raids destroyed about half of Hamburg’s buildings yet electricity, gas, telegraph and rail services resumed within days, The US Strategic Bombing Survey reported within a few months Hamburg had recovered 80% of its former productivity.

There is an important caveat to this story of resilience and that is when an event has a deep and pervasive effect across the whole economic system.

Bank failures can morph from one-off shocks into a crisis for the whole economy. Thus the failure of Lehman was the harbinger of a wider meltdown in the financial system which triggered a deep recession in the West.

Political change which destroys a liberal economic order is another systemic shock, something illustrated by the disastrous experience of the Zimbabwean and Venezuelan economies.

Geopolitical shifts can also change fundamental economic relationships. The Arab-Israel war of 1973, the Iranian Revolution of 1979 and the Iran-Iraq war in 1981 pushed oil prices sharply higher and inflicting recessions on the oil consuming nations of the West.

Finally, it is possible to imagine shocks, such as revolutions or nuclear wars, of a scale which would sweep away existing economic structures.

These are vital exceptions. But much of the time external events do not radically alter the path of growth. Even major news events, ones with huge political and human consequences, often have little lasting economic effect.

It is the dry economic stuff that rarely makes the front pages that matters most: the economic cycle, monetary policy and the structure of the economy. To work out where the global economy is going it is worth focusing a bit more on the economic and financial data and a bit less on the spectacular, headline grabbing stuff.

P.S. – Earlier this year we wrote about the surprising decline of inequality in the UK. Last week the Institute for Fiscal Studies confirmed that inequality has fallen since the financial crisis. The reduction has been driven by a declining income inequality in London, rising employment and falling incomes for higher earners. The problem for the UK is not rising inequality, but the decline in real incomes for many people, especially those in the middle of the income distribution.

OUR REVIEW OF LAST WEEK’S NEWS

The FTSE 100 ended the week up 0.1% at 7,453.

UK inflation unexpectedly slowed to 2.6% in June, reducing expectations that the Bank of England will raise interest rates soon. The president of the European Central Bank, Mario Draghi, sought to dampen expectations for an early tightened of monetary policy in the euro area.

International economic briefing by Ian Stewart

Economics and business

Young Britons will need to save 18% of their salary for an “adequate” retirement, according to a report by International Longevity Centre-UK

The percentage of UK apprentices and interns who are paid less than the legal minimum wage increased to 18% in 2016, according to a government survey

UK companies are set to return a record £90.6bn to shareholders during 2017, according to data from Capita Asset Services

UK public sector net borrowing increased to £6.9bn in June, considerably higher than an expectation of £4.7bn

The US Conference Board’s Leading Economic Index rose faster-than-expected in June, suggesting US growth could re-accelerate in coming months

China’s holdings of US Treasuries rose by $10bn in May to its highest ever level

China’s economy grew by an annualised rate of 6.9% during Q2, boosted by strong retail sales and an expansion in industrial production during June

Companies in the UK will be banned from charging credit card fees and surcharges from January 2018

Mario Draghi confirmed that he was committed “to increase the [QE] programme in terms of size and/or duration” if “the outlook becomes less favourable”

Despite continued monetary stimulus, European economists have cut their inflation forecasts for 2017, 2018 and 2019, according to an ECB survey

France’s most senior military chief resigned following a clash with President Emmanuel Macron over proposed cuts to defence spending highlighting difficulties Mr Macron may face in enacting his pro-growth agenda

The Bank of Japan lowered its inflation forecast for 2017, saying that despite “a moderate recovery… the movement of prices is soft”

Brexit and European politics

Germany’s foreign minister, Sigmar Gabriel, warned businesses and citizens to avoid carrying out business and travelling to Turkey

The EU said it is “very close” to triggering it’s Article 7 procedure against Poland – potentially leading to the suspension of its voting rights – as Poland passes law putting courts under government control

Reuters reports that the number of new regulatory bodies that may be required post-Brexit may be “low”, with government sources suggesting fewer than 10 may be required to cover the UK economy

Theresa May met with UK corporate leaders and pledged an “implementation phase” to avoid a “cliff edge” for businesses after Brexit

The probability that the UK will fail to reach a trade deal with the EU is “substantial” and could cause “significant” disruption to the UK economy, according to Moody’s

Liam Fox, the UK’s international trade secretary said that the UK can “survive” without an EU free trade deal post Brexit

He added that a UK-EU free trade agreement “should be easiest in history of mankind” as the starting point is “zero tariffs and maximum regulatory equivalence”

The EU’s chief Brexit negotiator, Michel Barnier, warned Britain that mass deregulation would scupper hopes of a lasting trade deal with the EU and said Britain should maintain a “level playing field”

Citigroup and Deutsche Bank confirmed plans to base their main EU trading operations in Frankfurt

The FT reports that the Bank of America has chosen Dublin as the main base for its EU investment banking and market operations after Brexit

There has been sharp fall in national insurance registrations by EU nationals in London over the last year, according to the Centre for London

And finally…

An autonomous security robot designed to spot misdemeanours, criminals and parking violations in a Washington DC shopping centre has had to be decommissioned after apparently taking its own life and driving into a fountain – Darth Wader

David Rumbens is a Partner within Deloitte Access Economics. He is a macroeconomist with extensive experience in applied economic and quantitative analysis of the Australian economy, along with considerable experience in labour market analysis.

Ian Stewart is a Partner and Chief Economist at Deloitte where he advises Boards and companies on macroeconomics. Ian devised the Deloitte Survey of Chief Financial Officers and writes a popular weekly economics blog, the Monday Briefing. His previous roles include Chief Economist for Europe at M...

Harry joined Deloitte Access Economics in January 2017 after completing a Bachelors of Arts and Commerce, with honours in Econometrics and Business Statistics from Monash University. Harry’s area of focus is data analytics and econometric modelling, having conducted a range of research surroundin...